SOLUTION MANUAL FOR
h h
h Principles Of Auditing And Other Assurance Services
h h h h h h h
23rd Edition By Ray Whittington Kurt
h h h h h h
ALL Chapters (1 - 21)
h h h h
, Table of Contents
h h
Chapterh1:hThehRolehofhthehPublichAccountanthinhthehAmericanEconomy
Chapterh2:hProfessionalhStandards
Chapterh3:hProfessionalhEthics
Chapterh4:hLegalhLiabilityhofhCPAs
Chapterh5:hAudithEvidencehandhDocumentation
Chapterh6:hAudithPlanning,hUnderstandinghthehClient,hAssessingRisks,handhResponding
Chapterh7:hInternalhControl
Chapterh8:hConsiderationhofhInternalhControlhinhanhInformationTechnologyhEnvironment
Chapterh9:hAudithSampling
Chapterh10:hCashhandhFinancialhInvestments
Chapterh11:hAccountshReceivable,hNoteshReceivable,handRevenue
Chapterh12:hInventorieshandhCosthofhGoodshSold
Chapterh13:hProperty,hPlant,handhEquipment:hDepreciationhandDepletion
Chapterh14:hAccountshPayablehandhOtherhLiabilities
Chapterh15:hDebthandhEquityhCapital
Chapterh16:hAuditinghOperationshandhCompletinghthehAudit
Chapterh17:hAuditors’hReports
Chapterh18:hIntegratedhAuditshofhPublichCompanies
Chapterh19:hAdditionalhAssurancehServices:hHistoricalhFinancialInformation
Chapterh20:hAdditionalhAssurancehServices:hOtherhInformation
Chapterh21:hInternal,hOperational,handhCompliancehAuditing
,CHAPTER 1 h
The Role of the Publi
h h h h
c Accountant in the
h h h
American Economy h
ReviewhQuestions
1-1 Theh―crisishofhcredibility‖hlargelyharosehfromhthehnumberhofhcompanieshthathrestatedhtheirhpreviouslyhissu
edhfinancialhstatementshash ah resulthofh accountinghirregularitieshandhfraud.h Especiallyhresponsiblehwerehthe
hveryhvisiblehEnronhandhWorldComhfraudhcases.hBothhcompaniesh filedhforh bankruptcyhandhconstitutedhth
ehlargesthcompanieshinhAmericanhhistoryhtohdohso.h Thehextenthofhthehaccountinghirregularitieshandhfraudh
beinghinvestigatedhandhdisclosedhbroughthintohquestionhtheheffectivenesshofhfinancialhstatementhaudits.h In
haddition,hthehcriminalhconvictionhofhArthurhAndersen,hLLP,honehofhthehthenhBigh5haccountinghfirms,honhc
hargeshofhdestroyinghdocumentshrelatedhtohthehEnronhcasehbroughthintohquestionhthehethicshstandardshofht
hehprofession.
1-2 Assurancehservicesharehprofessionalhserviceshthathenhancehthehqualityhofhinformation,horhitshcontext,hfor
hdecision-
making.hThehtwohtypeshare:h(a)hthosehthathincreasehthehreliabilityhofhinformationhandh(b)hthosehthathinv
olvehputtinghinformationhinhahformhorhcontexththathfacilitateshdecision-making.
1-3 Ahfinancialhstatementhaudith is,hbyhfar,hthehmosthcommonhtypehofhattesthengagement.h Thehoverallhassertion
,hmadehbyhmanagement,hmosthfrequentlyhishthaththehfinancialhstatementshfollowhgenerallyhacceptedhaccoun
tinghprinciples.
1-4 Ahlargehcorporationhwithhsecuritieshlistedhonhahstockhexchangehishrequiredhbyhthehruleshofhthehstockhexchan
gehandhbyhthehruleshofhthehSecuritiesh andhExchangehCommissionhtohprovidehanhaudith reporth withhthehannu
alhfinancialhstatementshfurnishedhtohitshstockholders.h Ithalsohishrequiredhtohengagehthehauditorshtohprovideh
anhopinionhonhitshinternalhcontrol.hAparthfromhlegalhrequirements,hhowever,hahlargehlistedhcorporationhre
cognizeshthathithmusthmaintainhinvestorhconfidencehinhthehreliabilityhofhitshfinancialhstatementsh andh interna
lhcontrolhoverh financialh reportingh ifh ith ish tohcontinuehtohbehablehtoh securehcapitalhfromhthehpublic.hThehrep
orth byhahfirmhofhcertifiedhpublichaccountantshaddshcredibilityhtohthehfinancialhstatementshpreparedhbyhthehc
orporation.h Whenhahsmallhfamily-
ownedhenterprisehelectsh tohhavehanhaudit,hthehpurposehusuallyhishtohusehthehauditors'hreporthtohsupporthanha
pplicationh forhahbankhloan.
, 1-5 Ahreporthbyhanhindependenthpublichaccountanthconcerninghthehfairnesshofhahcompany'shfinancialhstatement
shishcommonlyhrequiredhinhthehfollowinghsituations:
(1) Applicationhforhahbankhloan.
(2) Establishinghcredith forhpurchasehofh merchandise,hequipment,horhotherhassets.
(3) Reportinghoperatinghresults,h financialhposition,handhcashhflowsh tohabsenteehownersh (stockholder
shorhpartners).
(4) Issuancehofhsecuritieshbyhahcorporation.
(5) Annualhfinancialhstatementsh byhahcorporationhwithhsecuritiesh listedhonhahstockhexchangehorhtrade
dhoverhthehcounter.
(6) Salehofhanhongoinghbusiness.
(7) Terminationhofh ah partnership.
1-6 Tohaddhcredibilityhtohfinancialhstatementsh ishtohincreasehthehlikelihoodhthaththeyhhavehbeenhpreparedhfollo
winghthehappropriatehcriteria,husuallyhgenerallyhacceptedhaccountinghprinciples.h Ashsuch,hanhincreasehinhcr
edibilityhresultshinhfinancialhstatementshthathcanhbehbelievedhandhreliedhuponhbyhthirdhparties.
1-7 Businesshriskhish thehriskhthath thehinvestmenthwillhbehimpairedhbecausehahcompanyhinvestedhinhish unableht
ohmeethitshfinancialhobligationshduehtoheconomichconditionshorhpoorhmanagementhdecisions.hInformationh
riskhishthehriskhthaththehinformationhusedhtohassesshbusinesshriskhishnothaccurate.hAuditorshcanhdirectlyh
reducehinformationhrisk,hbuthhavehonlyhlimitedheffecthonhbusinesshrisk.
1-8 Aththehbeginninghofhthehcentury,hthehprincipalhobjectivehofhauditinghwash thehpreventionhandhdetectionhofhf
raud.hAudithworkhcenteredhonhthehbalancehsheet,hbecausehthehincomehstatementhwashregardedhashhighlyhco
nfidentialhandhnoth forhpublichdisclosure.h Today,hthehprincipalhobjectivehofhauditinghish tohformhanhopinion
honhthehfairnessh ofhfinancialhstatementsh andhtheirhconformityhwithhgenerallyhacceptedhaccountinghprinciple
s.h Buththehprofessionalhstandardshalsohrequirehthathanhaudith behdesignedhtohprovidehreasonablehassuranceh
ofhdetectinghmaterialhmisstatements,hduehtoherrorsh orhfraud.h Particularhemphasish ish placedhonhthehincome
hstatementh whichhish ofhgreath importancehtohinvestors.h Auditinghtodayhalsohhash thehobjectivesh ofhmeetinght
hehrequirementshofhthehSecuritieshandhExchangehCommissionh(SEC)h andhthehPublichCompanyhAccountin
ghOversighthBoardhforhpublichcompanies.
1-9 Thehstatementh ish incorrect.hThehincreasinghintegratedhdatabaseshofh today,halonghwithhavailablehaudi
thprocedureshmakehauditedhentirehpopulationshahpossibilityhinhmanyhsituations.
1-10 Anhoperationalhaudithattemptshtohmeasurehtheheffectivenesshandhefficiencyhofhahspecifichunithofhanhorg
anization.h Ithinvolvesh morehsubjectivehjudgmentshthanhahcompliancehaudithorhanhaudith ofhfinancialhstat
ementshbecausehthehcriteriah ofheffectivenesshandhefficiencyhofhdepartmentalhperformanceharehnoth ashcl
earlyhestablishedhasharehmanyhlawshandhregulationshorhgenerallyhacceptedhaccountinghprinciples.
Thehreporth preparedhafterhcompletionhofhanhoperationalhaudith ish usuallyhdirectedhtohmanagementh
ofhthehorganizationhinhwhichhthehaudithworkhwashdone.
1-11 Ahcompliancehaudithishanhaudithtohdeterminehwhetherhfinancialhreportshorhotherhassertionsharehinhcomplia
ncehwithhestablishedhcriteria.h Thehnecessaryhingredientsharehverifiablehdatahandhthehexistencehofhstandard
shestablishedhbyhanhauthoritativehbody.h Anhoperationalhaudit,honhthehotherhhand,hish ahreviewhofhahdepart
menthorhotherhunithofhahbusinessh orhgovernmentalhorganizationhtohmeasurehtheheffectivenesshandhefficien
cyhofhoperations.h InternalhauditorshoftenhperformhoperationalhauditshashdohauditorshemployedhbyhthehGo
vernmenthAccountabilityhOfficeh(GAO)hofhthehfederalhgovernment.
1-12 Internalhauditorsh musthbehindependenthofhthehdepartmenthheadshandhotherhlinehexecutiveshwhosehworkhthe
yhreview.hHowever,hinternalhauditorsharehnothindependenthinhthehsamehsensehashahpublichaccountinghfirm.
h h
h Principles Of Auditing And Other Assurance Services
h h h h h h h
23rd Edition By Ray Whittington Kurt
h h h h h h
ALL Chapters (1 - 21)
h h h h
, Table of Contents
h h
Chapterh1:hThehRolehofhthehPublichAccountanthinhthehAmericanEconomy
Chapterh2:hProfessionalhStandards
Chapterh3:hProfessionalhEthics
Chapterh4:hLegalhLiabilityhofhCPAs
Chapterh5:hAudithEvidencehandhDocumentation
Chapterh6:hAudithPlanning,hUnderstandinghthehClient,hAssessingRisks,handhResponding
Chapterh7:hInternalhControl
Chapterh8:hConsiderationhofhInternalhControlhinhanhInformationTechnologyhEnvironment
Chapterh9:hAudithSampling
Chapterh10:hCashhandhFinancialhInvestments
Chapterh11:hAccountshReceivable,hNoteshReceivable,handRevenue
Chapterh12:hInventorieshandhCosthofhGoodshSold
Chapterh13:hProperty,hPlant,handhEquipment:hDepreciationhandDepletion
Chapterh14:hAccountshPayablehandhOtherhLiabilities
Chapterh15:hDebthandhEquityhCapital
Chapterh16:hAuditinghOperationshandhCompletinghthehAudit
Chapterh17:hAuditors’hReports
Chapterh18:hIntegratedhAuditshofhPublichCompanies
Chapterh19:hAdditionalhAssurancehServices:hHistoricalhFinancialInformation
Chapterh20:hAdditionalhAssurancehServices:hOtherhInformation
Chapterh21:hInternal,hOperational,handhCompliancehAuditing
,CHAPTER 1 h
The Role of the Publi
h h h h
c Accountant in the
h h h
American Economy h
ReviewhQuestions
1-1 Theh―crisishofhcredibility‖hlargelyharosehfromhthehnumberhofhcompanieshthathrestatedhtheirhpreviouslyhissu
edhfinancialhstatementshash ah resulthofh accountinghirregularitieshandhfraud.h Especiallyhresponsiblehwerehthe
hveryhvisiblehEnronhandhWorldComhfraudhcases.hBothhcompaniesh filedhforh bankruptcyhandhconstitutedhth
ehlargesthcompanieshinhAmericanhhistoryhtohdohso.h Thehextenthofhthehaccountinghirregularitieshandhfraudh
beinghinvestigatedhandhdisclosedhbroughthintohquestionhtheheffectivenesshofhfinancialhstatementhaudits.h In
haddition,hthehcriminalhconvictionhofhArthurhAndersen,hLLP,honehofhthehthenhBigh5haccountinghfirms,honhc
hargeshofhdestroyinghdocumentshrelatedhtohthehEnronhcasehbroughthintohquestionhthehethicshstandardshofht
hehprofession.
1-2 Assurancehservicesharehprofessionalhserviceshthathenhancehthehqualityhofhinformation,horhitshcontext,hfor
hdecision-
making.hThehtwohtypeshare:h(a)hthosehthathincreasehthehreliabilityhofhinformationhandh(b)hthosehthathinv
olvehputtinghinformationhinhahformhorhcontexththathfacilitateshdecision-making.
1-3 Ahfinancialhstatementhaudith is,hbyhfar,hthehmosthcommonhtypehofhattesthengagement.h Thehoverallhassertion
,hmadehbyhmanagement,hmosthfrequentlyhishthaththehfinancialhstatementshfollowhgenerallyhacceptedhaccoun
tinghprinciples.
1-4 Ahlargehcorporationhwithhsecuritieshlistedhonhahstockhexchangehishrequiredhbyhthehruleshofhthehstockhexchan
gehandhbyhthehruleshofhthehSecuritiesh andhExchangehCommissionhtohprovidehanhaudith reporth withhthehannu
alhfinancialhstatementshfurnishedhtohitshstockholders.h Ithalsohishrequiredhtohengagehthehauditorshtohprovideh
anhopinionhonhitshinternalhcontrol.hAparthfromhlegalhrequirements,hhowever,hahlargehlistedhcorporationhre
cognizeshthathithmusthmaintainhinvestorhconfidencehinhthehreliabilityhofhitshfinancialhstatementsh andh interna
lhcontrolhoverh financialh reportingh ifh ith ish tohcontinuehtohbehablehtoh securehcapitalhfromhthehpublic.hThehrep
orth byhahfirmhofhcertifiedhpublichaccountantshaddshcredibilityhtohthehfinancialhstatementshpreparedhbyhthehc
orporation.h Whenhahsmallhfamily-
ownedhenterprisehelectsh tohhavehanhaudit,hthehpurposehusuallyhishtohusehthehauditors'hreporthtohsupporthanha
pplicationh forhahbankhloan.
, 1-5 Ahreporthbyhanhindependenthpublichaccountanthconcerninghthehfairnesshofhahcompany'shfinancialhstatement
shishcommonlyhrequiredhinhthehfollowinghsituations:
(1) Applicationhforhahbankhloan.
(2) Establishinghcredith forhpurchasehofh merchandise,hequipment,horhotherhassets.
(3) Reportinghoperatinghresults,h financialhposition,handhcashhflowsh tohabsenteehownersh (stockholder
shorhpartners).
(4) Issuancehofhsecuritieshbyhahcorporation.
(5) Annualhfinancialhstatementsh byhahcorporationhwithhsecuritiesh listedhonhahstockhexchangehorhtrade
dhoverhthehcounter.
(6) Salehofhanhongoinghbusiness.
(7) Terminationhofh ah partnership.
1-6 Tohaddhcredibilityhtohfinancialhstatementsh ishtohincreasehthehlikelihoodhthaththeyhhavehbeenhpreparedhfollo
winghthehappropriatehcriteria,husuallyhgenerallyhacceptedhaccountinghprinciples.h Ashsuch,hanhincreasehinhcr
edibilityhresultshinhfinancialhstatementshthathcanhbehbelievedhandhreliedhuponhbyhthirdhparties.
1-7 Businesshriskhish thehriskhthath thehinvestmenthwillhbehimpairedhbecausehahcompanyhinvestedhinhish unableht
ohmeethitshfinancialhobligationshduehtoheconomichconditionshorhpoorhmanagementhdecisions.hInformationh
riskhishthehriskhthaththehinformationhusedhtohassesshbusinesshriskhishnothaccurate.hAuditorshcanhdirectlyh
reducehinformationhrisk,hbuthhavehonlyhlimitedheffecthonhbusinesshrisk.
1-8 Aththehbeginninghofhthehcentury,hthehprincipalhobjectivehofhauditinghwash thehpreventionhandhdetectionhofhf
raud.hAudithworkhcenteredhonhthehbalancehsheet,hbecausehthehincomehstatementhwashregardedhashhighlyhco
nfidentialhandhnoth forhpublichdisclosure.h Today,hthehprincipalhobjectivehofhauditinghish tohformhanhopinion
honhthehfairnessh ofhfinancialhstatementsh andhtheirhconformityhwithhgenerallyhacceptedhaccountinghprinciple
s.h Buththehprofessionalhstandardshalsohrequirehthathanhaudith behdesignedhtohprovidehreasonablehassuranceh
ofhdetectinghmaterialhmisstatements,hduehtoherrorsh orhfraud.h Particularhemphasish ish placedhonhthehincome
hstatementh whichhish ofhgreath importancehtohinvestors.h Auditinghtodayhalsohhash thehobjectivesh ofhmeetinght
hehrequirementshofhthehSecuritieshandhExchangehCommissionh(SEC)h andhthehPublichCompanyhAccountin
ghOversighthBoardhforhpublichcompanies.
1-9 Thehstatementh ish incorrect.hThehincreasinghintegratedhdatabaseshofh today,halonghwithhavailablehaudi
thprocedureshmakehauditedhentirehpopulationshahpossibilityhinhmanyhsituations.
1-10 Anhoperationalhaudithattemptshtohmeasurehtheheffectivenesshandhefficiencyhofhahspecifichunithofhanhorg
anization.h Ithinvolvesh morehsubjectivehjudgmentshthanhahcompliancehaudithorhanhaudith ofhfinancialhstat
ementshbecausehthehcriteriah ofheffectivenesshandhefficiencyhofhdepartmentalhperformanceharehnoth ashcl
earlyhestablishedhasharehmanyhlawshandhregulationshorhgenerallyhacceptedhaccountinghprinciples.
Thehreporth preparedhafterhcompletionhofhanhoperationalhaudith ish usuallyhdirectedhtohmanagementh
ofhthehorganizationhinhwhichhthehaudithworkhwashdone.
1-11 Ahcompliancehaudithishanhaudithtohdeterminehwhetherhfinancialhreportshorhotherhassertionsharehinhcomplia
ncehwithhestablishedhcriteria.h Thehnecessaryhingredientsharehverifiablehdatahandhthehexistencehofhstandard
shestablishedhbyhanhauthoritativehbody.h Anhoperationalhaudit,honhthehotherhhand,hish ahreviewhofhahdepart
menthorhotherhunithofhahbusinessh orhgovernmentalhorganizationhtohmeasurehtheheffectivenesshandhefficien
cyhofhoperations.h InternalhauditorshoftenhperformhoperationalhauditshashdohauditorshemployedhbyhthehGo
vernmenthAccountabilityhOfficeh(GAO)hofhthehfederalhgovernment.
1-12 Internalhauditorsh musthbehindependenthofhthehdepartmenthheadshandhotherhlinehexecutiveshwhosehworkhthe
yhreview.hHowever,hinternalhauditorsharehnothindependenthinhthehsamehsensehashahpublichaccountinghfirm.
